AUD gains as China trade deal concretizes, Yuan ranged

Forex News and Events

Australia and China are preparing to sign a free trade agreement in 2015; ten-year long negotiations finally materialize. The agreement will provide Australian economy a supreme access to the world’s second largest market; tariffs on 95% of Australian products will be removed once the deal is fully implemented within couple of years (two-to four years eyed), including commodity, energy imports but also dairy products, beef, sheep, wine. This privileged access will provide the Australian producers with a sizeable competitive advantage in the Chinese market. Moreover, Sydney will be a yuan trading center. The ability to directly exchange AUD verse Yuan, therefore jumping over USD, will be an additional positive side-effect of the free trade agreement. This is good news for Australia, holding more than 1/3 of its trade relations with China. In addition, the deal will simplify Chinese investments in Australia’s agricultural land and agrobusiness; the total investments are estimated up to 1.25 trillion dollar over the next 10 years.

AUD/USD extended gains to 0.8796 in Sydney. The AUD-appetite has been somewhat curbed by stronger JPY after Japan announced 1.7% q/q (annualized) contraction in the third quarter. The short-term bullish momentum strengthens as AUD/USD tests 0.8800/09 offers (optionality / 50-dma). More resistance should jump in at 0.8870/90 (Fib 38.2% on Sep-Nov drop / daily Ichimoku base). The minutes of RBA November meeting are due on Nov 18th, RBA FX transactions will be published on Nov 20th. The tougher tone on AUD being already priced in, we do not expect any surprises out of November minutes yet remain vigilant on FX trade book.

AUD/JPY eased from a fresh high 102.406. The weak Japanese GDP has first hit JPY-crosses, yet correction is perhaps underway. Indeed, the impact of April’s sales tax hike in Japan has been heavier than anticipated on the Abenomics. Therefore once the negative GDP will be digested, the anticipation for more growth supportive measure should certainly continue giving support to JPY-crosses. It is good time to chase dip-buying opportunities. AUD/JPY 3-month 25-delta risk reversals spike to four month highs as Japan PM Abe is expected to announce the delay in the second round of sales tax hike and snap elections in December shortly.

EUR/AUD sees resistance at 1.43350/1.44035, area including daily Ichimoku cloud top, 21, 50 and 100-dma. The 21-dma crossed below the 50-dma increasing downside pressures from the technical traders. Support is eyed at 1.41500/1.42054 (October downtrend base / daily Ichi base).

Yuan this week

USD/CNY trades ranged within August-November downtrend channel (6.1020/6.1350). The Chinese equities closed the day in the red (HSI -1.21%, Shanghai’s Composite -0.19%) despite Hong Kong – Shanghai connection that started today allowing 23.5 billion yuan of cross border transactions on daily basis. Scheduled this week, the Chinese government bond sale will likely give good support to offshore CNY, despite soft FDI and PMI expectations. Trend and momentum indicators in USD/CNY are marginally positive, as Honk Kong Monetary Authority provides 10 billion yuan liquidity via intraday repo facilities since last week to manage the liquidity risk related to the stock market connection. Large option barriers trail from 6.1350 to 6.1500 this week, will likely cap the topside.

Today's Key Issues (time in GMT)

2014-11-17T13:30:00 CAD Sep Int'l Securities Transactions, last 10.28B
2014-11-17T13:30:00 USD Nov Empire Manufacturing, exp 11.25, last 6.17
2014-11-17T14:00:00 CAD Oct Existing Home Sales MoM, last -1.40%
2014-11-17T14:15:00 USD Oct Industrial Production MoM, exp 0.20%, last 1.00%
2014-11-17T14:15:00 USD Oct Capacity Utilization, exp 79.30%, last 79.30%
2014-11-17T14:15:00 USD Oct Manufacturing (SIC) Production, exp 0.30%, last 0.50%

The Risk Today

EUR/USD has broken the resistance at 1.2509, favouring a longer rebound. The resistance at 1.2577 has held thus far. Another resistance can be found at 1.2632. Hourly supports stand at 1.2492 (13/11/2014 high) and 1.2395 (11/11/2014 low). In the longer term, EUR/USD is in a downtrend since May 2014. The break of the strong support area between 1.2755 (09/07/2013 low) and 1.2662 (13/11/2012 low) has opened the way for a decline towards the strong support at 1.2043 (24/07/2012 low). A key resistance stands at 1.2886 (15/10/2014 high).

GBP/USD is trying to bounce. However, prices have thus far failed to break the hourly resistance at 1.5781 (13/11/2014 high). Another hourly resistance can be found at 1.5840 (intraday high). An hourly support lies at 1.5593 (14/11/2014 low). In the longer term, the break of the support at 1.5855 (12/11/2013 low) confirms an underlying bearish trend. A conservative downside risk is given by a test of the support at 1.5423 (14/08/2013 low). Another support can be found at 1.5102 (02/08/2013 low). A key resistance lies at 1.6038 (30/10/2014 high, see also the declining channel).

USD/JPY continues to move within its rising channel. Hourly supports can be found at 115.31 (13/11/2014 low) and 114.89 (see also the rising channel). An hourly resistance now lies at 117.05. A long-term bullish bias is favoured as long as the key support 105.23 (15/10/2014 high) holds. The break of the major resistance at 110.66 (15/08/2008 high) opens the way for a further rise towards 120.00 (psychological threshold, see also the 61.8% retracement of the 1998-2011 decline). A major resistance stands at 124.14 (22/06/2007 high).

USD/CHF has broken the hourly support at 0.9617. Monitor the test of the support at 0.9544. Another support can be found at 0.9442. Hourly resistances lie at 0.9622 (13/11/2014 low) and 0.9701. From a longer term perspective, the technical structure favours a full retracement of the large corrective phase that started in July 2012. The recent new highs above the key resistance at 0.9691 confirm this outlook. A strong support stands at 0.9368 (15/10/2014 low). A key resistance can be found at 0.9839 (22/05/2013 high).

Resistance and Support: